President signs regulatory reform act; FDIC, NCUA recap Q1 ’18

President Signs Regulatory Reform Act

On May 24, 2018, President Donald Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act.

Provisions of the legislation, which largely amends portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, include:

• Ending company-run stress tests for banks with less than $250 billion in assets
• Increasing the systemically important financial institution (SIFI) designation asset threshold from $50 billion to $250 billion
• Providing an exemption from the Volcker rule for banks with less than $10 billion in assets and eliminating the Volcker naming rights restrictions for all asset managers and funds affiliated with banks
• Raising the eligibility requirement for using the Fed’s Small-Bank Holding Company Policy Statement from $1 billion in assets to $3 billion in assets
• Raising the eligibility requirement for the 18-month exam cycle from $1 billion in assets to $3 billion in assets
• Expanding credit union business lending
• Simplifying capital calculations for community banks with less than $10 billion in assets
• Increasing the threshold for mandatory risk committees from $10 billion in assets to $50 billion in assets    

Federal financial regulators will now begin working to implement various provisions of the legislation and incorporating the changes into their supervisory processes. However, the full impact of these regulatory relief efforts is not likely to be realized until financial services companies have a few cycles of examinations completed with their primary regulators. To better understand how these regulatory changes will affect their institutions, banks and credit unions are encouraged to maintain close communication with their respective regulators.

From the Federal Financial Institution Regulators

FDIC Issues Quarterly Banking Profile for First-Quarter 2018

The Federal Deposit Insurance Corp. (FDIC) issued, on May 22, 2018, its “Quarterly Banking Profile,” covering the first quarter of 2018. According to the report, FDIC-insured commercial banks and savings institutions earned $56 billion in the first quarter of 2018, an increase of $12.1 billion (27.5 percent) from a year earlier. The driving factors in the increase in net income were higher net operating revenue and a lower effective tax rate from the 2017 tax reform law, partially offset by higher loan-loss provisions and noninterest expense.

The report provides these additional first-quarter statistics:

• Net interest income of $131.3 billion was earned, up 8.5 percent as compared to the same quarter in 2017.
• Average return on assets rose by 24 basis points from 2017 to reach 1.28 percent.
• Banks allocated $12.4 billion in loan-loss provisions in the first quarter of 2018, an increase of $356.6 million (3 percent) from a year earlier. Almost 37 percent of institutions reported higher loan-loss provisions than in the first quarter of 2017. The increase is due to higher net charge-offs and a growing loan portfolio.
• Community banks earned $6.1 billion in net income, up 17.7 percent from the same time last year.    

At the end of the first quarter, there were 5,607 FDIC-insured commercial banks and savings institutions, a decline from 5,670 the year before. During the quarter, 65 institutions were acquired, three new charters were added, and there were no failures. The number of institutions on the FDIC’s problem bank list declined from 95 to 92.

NCUA Releases First-Quarter 2018 Performance Data

On June 6, 2018, the National Credit Union Administration (NCUA) reported quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the first quarter of 2018. Here are some highlights:

• The number of federally insured credit unions continues to decline – from 5,737 at the end of the first quarter of 2017 to 5,530 at the end of the first quarter of 2018.
• Net income at an annual rate was $12.6 billion, up 35.4 percent or $3.3 billion from 2017.
• Total assets were $1.42 trillion, 5.9 percent greater than a year ago.
• Compared to one year earlier, the return on average assets increased from 71 to 90 basis points for the first quarter of 2018.
• Outstanding loan balances increased 9.9 percent year over year, to $971.9 billion.
• Insured deposits (shares) grew $58 billion (5.5 percent) year over year, to $1.13 trillion.    

NCUA Approves Final Member Business Loan Rule

On June 1, 2018, the NCUA announced changes to the member business lending rule to conform with changes to the Federal Credit Union Act incorporated into the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law on May 24. Among other changes, federally insured credit union loans made on any one- to four-unit family dwellings no longer will count as member business loans, and so will not count toward the aggregate member business loan cap imposed on each federally insured credit union.

The NCUA board also approved the removal of the members’ occupancy requirement for loans secured by liens on one- to four-unit family dwellings, as previously dwellings of that size were required to be a member’s primary residence to be excluded.

The final rule became effective on June 5.

OCC Announces New Incoming Deputy Comptroller and Chief Accountant

On June 18, 2018, the Office of the Comptroller of the Currency (OCC) announced Sydney Menefee will be its next deputy comptroller and chief accountant. Menefee will lead the OCC’s bank accounting and financial reporting efforts, providing accounting counsel to examiners, the banking industry, and the accounting profession. She will assume these duties at the end of July, upon the retirement of Rusty Thompson.

OCC Issues Semiannual Risk Perspective

On May 24, 2018, the OCC issued its “Semiannual Risk Perspective” for spring 2018, which focuses on issues that pose threats to OCC-regulated financial institutions and lists risk themes for the federal banking system based on data as of March 31, 2018. These include credit, operational, compliance, and interest rate risks. The report presents information in the areas of operating environment, bank performance, special topics in emerging risk, trends in key risks, and supervisory actions.

The report suggests the following related to the risk themes:

• Although evidence of eased underwriting exists, competition for quality loans is strong. Underwriting practices should be monitored to assess credit risk and lender complacency.
• Adapting to increasing cybersecurity threats, relying on third-party relationships for important services and operations, consolidating technology service providers, and evolving business and operating processes all add to the increased operational risk.
• Money laundering risks and requirements for complex and amended regulations elevate compliance risk.
• In response to increasing interest rates, banks may experience shifts in liabilities or increasing costs.

OCC Issues Statement on Small-Dollar Lending

The OCC, on May 23, 2018, issued Bulletin 2018-14, “Core Lending Principles for Short-Term, Small-Dollar Installment Lending,” as a reminder to banks of the core lending principles for managing the risks associated with offering short-term, small-dollar installment lending programs. Consistent with the OCC’s support for responsible innovation by banks to meet the evolving needs of consumers, businesses, and communities, the OCC encourages banks to offer these loans; however, banks should understand the core lending principles and should review plans with their OCC portfolio manager, examiner, or supervisor before implementing such plans.

According to Bulletin 2018-14, banks should develop and implement these programs consistent with sound risk management practices and align the programs with their overall business plans and strategies. Examples of such strategies may include working with consumers who are able to repay a loan despite having a credit profile that is outside of a bank’s typical underwriting standards.

Regulators Propose Changes to the Volcker Rule

The Board of Governors of the Federal Reserve System (the Fed), the OCC, the FDIC, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission, on May 30, 2018, approved for public comment a comprehensive proposed rule to simplify and tailor Volcker rule compliance requirements. The rule generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds.

Banking entities subject to the Volcker rule since its December 2013 implementation have found it to be complex, creating compliance uncertainty. The proposed amendments would simplify the rule by removing or modifying requirements that are not deemed necessary for effective implementation.

Developed by the regulators, the changes encompass the following areas:

• Revised compliance requirements based on the size of trading assets and liabilities, with the strictest requirements on firms with the most trading activity
• Clarified definition of "trading account"
• Clarified guidance that firms that trade within appropriately developed internal risk limits are engaged in permissible market making or underwriting activity
• Simplified criteria for a banking entity seeking to rely on the hedging exemption from the proprietary trading prohibition
• Limited impact of the Volcker rule on the foreign activity of foreign banks
• Simplified required trading activity information to be provided to the agencies by banking entities

Changes to the Volcker rule provisions made by the recently enacted Economic Growth, Regulatory Reform, and Consumer Protection Act include exempting community banks – those with total consolidated assets less than $10 billion and with total trading assets and liabilities that are not more than 5 percent of total consolidated assets – from the Volcker rule restrictions.

Comments on the proposal will be accepted until 60 days after publication in the Federal Register.

Senate Confirms FDIC Chair

On May 24, 2018, the U.S. Senate voted 69-24 to confirm Jelena McWilliams as chair of the FDIC. She previously served as chief counsel and deputy staff director for the Senate Banking Committee, and as counsel to the Senate Small Business Committee. Most recently, McWilliams was executive vice president and general counsel at regional Cincinnati-based Fifth Third Bank. She will replace Chairman Martin Gruenberg, who has led the regulatory agency since 2011. McWilliams will serve a five-year term.

FFIEC Releases Exam Procedures for Beneficial Ownership Rule

On May 11, 2018, the Federal Financial Institutions Examination Council (FFIEC), which consists of the Fed,  the FDIC, the OCC, the NCUA, and the Consumer Financial Protection Bureau, issued new exam procedures for the Financial Crimes Enforcement Network’s (FinCEN) final rule from 2016, “Customer Due Diligence Requirements for Financial Institutions.” The 2016 rule, which became effective May 11, 2018, clarifies customer due diligence requirements. It also requires covered financial institutions to identify and verify the identity of beneficial owners of certain legal entity customers.  The FFIEC’s announcement includes overview and examination procedures for customer due diligence and also for beneficial ownership for legal entity customers.

On a related matter, on May 16, 2018, FinCEN issued an administrative ruling that temporarily suspends the application of the beneficial ownership requirements for certificate of deposit rollovers and loans that renew automatically. This exception, retroactive to the rule’s May 11, 2018, effective date, will expire on Aug. 9, 2018. During the temporary suspension, FinCEN will make a determination about additional exceptive relief and whether it should be given for such financial products and services that were established before May 11, 2018, but are expected to roll over or renew after that date.

From the Financial Accounting Standards Board (FASB)

TRG for Credit Losses Meets to Discuss CECL Implementation

The Transition Resource Group (TRG) for Credit Losses met on June 11, 2018, to discuss the following additional implementation issues for the credit losses standard:

• Capitalized interest – how capitalized interest should be considered when estimating current expected credit losses (CECL) using a method other than a discounted cash flow (DCF) method. On page 11 in Memo No. 8, the FASB staff provided its recommendation that it would be inappropriate to consider unearned accrued interest when calculating CECL if following a method other than a DCF approach.
• Accrued interest – 1) whether to include accrued interest in the amended definition of amortized cost, and 2) whether the reversal of accrued interest on nonperforming financial assets should be recorded in interest income or allowance. For the first matter, the FASB staff supported the current definition of amortized cost basis that includes accrued interest, but it recommended that the board provide practical expedients to perform an assessment of collectability and determine expected cash flows for accrued interest separately from the loan balance and other components of amortized cost. For the second matter, the FASB staff said if an entity follows a sufficient nonaccrual policy, it would reverse accrued interest on loans in nonaccrual status by reversing interest income and reducing the amortized cost basis of the loans. The FASB staff determined that further deliberation was necessary to understand the impact of the recommended approach on credit card receivables. The FASB staff provided its recommendations on pages 9-10 and 13-14 in Memo No. 9.
• Transfers between classifications – how to apply CECL when transferring loans from held for sale (HFS) to held for investment (HFI) or credit impaired debt securities from available for sale (AFS) to held to maturity (HTM). The FASB staff provided its recommendations on pages 7-11 in Memo No. 10. 
• Recoveries – whether future expected cash receipts from a financial asset that has been written off or may be written off in the future (expected recoveries) should be included in the calculation of CECL. The FASB staff provided its recommendations on pages 12 and 13 in Memo No. 11.
• Refinancing and loan prepayment – whether entities are required to use the loan refinancing or restructuring guidance in Subtopic 310-20, “Receivables – Nonrefundable Fees and Other Costs,” to determine what constitutes a prepayment for the purposes of calculating CECL. The FASB staff provided its recommendation on pages 7-8 in Memo No. 12 that entities should not be required to use the loan modification guidance. The staff also shared its recommendation that prepayments should not be specifically defined for purposes of calculating  the allowance.        

The TRG largely agreed with the FASB staff recommendations. The conclusions will be memorialized in a TRG memo.

EITF Achieves Final Consensus on Cloud Computing Arrangements (CCAs)

At its meeting on June 7, 2018, the Emerging Issues Task Force (EITF) voted to issue a final consensus on Issue 17-A, “Customer’s Accounting for Implementation, Setup, and Other Upfront Costs (Implementation Costs) Incurred in a Cloud Computing Arrangement That Is Considered a Service Contract.” Consistent with the proposal, the accounting for implementation costs for CCAs that are service contracts will align with the requirements in ASC Subtopic 350-40 for internal-use software by capitalizing implementation costs during the development stage and amortizing those costs over the term of the hosting arrangement. Amortization of the capitalized implementation costs will be presented in the same income statement line item as hosting arrangement fees. Capitalized implementation costs will be presented in the same line items on the balance sheet and the cash flow statement as hosting arrangement fees.

Once issued, the final standard, which could be  early adopted, will be effective for public business entities in fiscal years beginning after Dec. 15, 2019, and interim periods within those years. For all other entities it  will be effective for years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.

From the Securities and Exchange Commission (SEC)

Chair Discusses Culture at Financial Institutions

In SEC Chair Jay Clayton’s address in New York on June 18, 2018, he shared several ideas related to corporate culture at financial institutions and the SEC:

• Culture is not an option. Every organization has a culture.
• Know your culture. In order to effectively manage a firm, you must know its culture.
• Culture is a collection of countless internal and external actions. Culture is not related solely to the words of management; rather, it is a collection of all the actions carried out within the organization at every level on a daily basis.
• Culture is preserved and enhanced through a clear and constant mission. The SEC’s mission is furthering the interests of long-term retail investors.
• Culture goes beyond the law and regulations. “The law may not prohibit all forms of lying, but your culture should reject it.”
• The SEC does not expect perfection; it does expect commitment and action. People will make mistakes, and those mistakes should be assessed to determine what remediation efforts are needed.

SEC Creates New Position of Senior Adviser for Digital Assets and Innovation

The SEC, on June 4, 2018, named Valerie A. Szczepanik as the senior adviser for digital assets and innovation for Division of Corporation Finance (Corp Fin) Director Bill Hinman. This new position was created to focus on emerging digital asset technologies and innovations, including initial coin offerings and cryptocurrencies, and coordinate work across the SEC on these matters. Most recently, Szczepanik was an assistant director in the Division of Enforcement’s Cyber Unit.

President Nominates New Commissioner

On June 4, 2018, President Trump nominated Elad L. Roisman to be a commissioner of the SEC for a five-year term. Roisman would replace outgoing Commissioner Michael Piwowar, who announced his resignation in May.

SEC Announces New Position of Chief Risk Officer

On May 31, 2018, the SEC announced that Julie A. Erhardt has been named as the acting chief risk officer as the SEC searches to fill this newly created position. Erhardt joined the SEC in 2004 as a deputy chief accountant in the Office of the Chief Accountant, and she continues to hold that position.

Deputy Chief Accountant Focuses on Implementation Matters for Tax Reform and Major Accounting Standards

On June 7, 2018, Deputy Chief Accountant Sagar Teotia, in the SEC’s Office of the Chief Accountant (OCA), addressed the 37th Annual SEC and Financial Reporting Institute Conference in Los Angeles. In his remarks, he covered the following topics:

• Tax reform and SAB 118
  
  • SAB 118 does not provide an option to defer application of the income tax accounting guidance. Instead, issuers should complete their analysis of the effect of the Tax Cuts and Jobs Act. While the SEC understands that some entities could not immediately analyze all the effects of the act and allows the measurement period alternatives to be taken in those cases, the SEC does not view this as permission to wait a full year before analyzing the effects. The SEC expects issuers to progress through the analysis in good faith, and timing will vary depending on facts and circumstances. Furthermore, the disclosures about the effects for which the accounting is incomplete should not be overlooked. The OCA remains open for consultations on any application issues.
• Revenue recognition (Topic 606)
  
  • Teotia covered the activities that his office has undertaken with respect to Topic 606 implementation, including the speeches OCA staff made during 2017 on revenue recognition implementation matters.
• Lease accounting (Topic 842)
  
  • Echoing his previous speeches, Teotia re-emphasized that lease accounting implementation will take time and require numerous steps. He focused on the identification of all arrangements that include leases, or embedded leases, saying that, “it may require time to complete.”
  • He noted agreement with the FASB to not form a TRG for lease accounting, unlike the board’s decision for revenue and credit losses. Even without a TRG, the FASB has moved quickly to address implementation issues by issuing one accounting standard and two proposed standards. Registrants, audit committees, and auditors are responsible for ensuring that any implementation issues are identified and resolved with the appropriate parties.
• Credit losses (Topic 326)
  
  • Teotia summarized the OCA’s involvement with credit loss implementation including consultations discussed in a previous OCA staff speech. He also noted the work of the TRG for Credit Losses.
• Other new accounting standards   
  • Specifically noting the cash flow statement and recognition and measurement standards, he reminded the audience not to forget about the other new standards that became effective on Jan. 1, 2018, as well as other standards such as those about hedging that will become effective soon.

Chief Accountant Speaks About Financial Reporting and Innovation

On June 6, 2018, in London, Chief Accountant Wesley Bricker addressed the Institute of Chartered Accountants in England and Wales. He covered the following topics:

• Highly connected global investing markets
• Financial reporting information available in markets, including information other than what is in the financial statements
• Financial reporting processes, including reference to the “U.S. Financial Reporting Structure for Public Issuers” that illustrates the  financial reporting structure in three different ways
• Critical role of audit regulators and audit standard-setters
• Critical role of auditors, including auditor choice and audit quality, and the auditors of tomorrow    

From the Public Company Accounting Oversight Board (PCAOB)

Chairman Discusses the PCAOB’s Future

PCAOB Chairman William Duhnke, on May 17, 2018, addressed the University of Kansas Auditing Symposium, where he discussed the first-ever request for public comment on the PCAOB’s strategic plan and covered principles that will guide the board’s actions and decisions. He shared a number of items that the board is considering in order to improve audit quality through inspections, as well as improving the reporting and communicating inspection results. The chairman also discussed approaches by audit regulators in other countries that could inform the board’s views.

Before closing, he posed a number of questions that the board must consider as it evaluates improvements to its programs that go beyond the inspections program.

Standing Advisory Group (SAG) Meets

The PCAOB’s SAG met June 5-6, 2018, in Washington, D.C. The SAG comprises various stakeholders – investors,  auditors, audit committee members, public company executives, and others – and advises the PCAOB on audit and professional  practice matters.

Meeting topics included the following:

• Panel discussion with the new board
• PCAOB standard-setting update
• Data and technology
• Cybersecurity
• Corporate culture implications for the audit
• Revised auditor’s reporting model implementation

PCAOB Announces Personnel Changes

The PCAOB announced, on May 22, 2018, that Chief Auditor Martin F. Baumann would leave the board after 12 years of service. The PCAOB also announced on May 18, 2018, that Director of Registration and Inspections Helen Munter would leave after 14 years of service. These departures were effective at the end of May 2018. Finally, on May 29, 2018, the PCAOB announced that Director of Enforcement and Investigations Claudius Modesti would leave the agency after 14 years of service.

From the Center for Audit Quality (CAQ)

CAQ Releases Highlights of SEC Regulations Committee Meeting

On May 22, 2018, the CAQ released highlights from its SEC Regulations Committee meeting held on March 13, 2018, with SEC staff. At the meeting, the SEC’s Corp Fin staff provided a staffing update for Corp Fin’s Office of the Chief Accountant (Corp Fin OCA).

Financial reporting updates discussed at the meeting included:

• Disclosure of the impact of tax reform legislation using non-GAAP and pro form a financial information 
• Waivers of financial statements required by Rule 3-09 of Regulation S-X (for equity method investees)
• Certain SEC presentation and disclosure requirements for the revenue and lease accounting standards
• Financial statements used in an initial public offering to assess significance when a draft registration statement is submitted
• Certain audit requirements for a reverse merger involving two operating companies 

Anti-Fraud Collaboration Hosts Non-GAAP Measures Webcast

To expand on information in the CAQ’s March 2018 report, “Non-GAAP Measures: A Roadmap for Audit Committees,” the Anti-Fraud Collaboration is hosting a free Continuing Professional Education webcast, “Non-GAAP Measures – What Do They Say About Fraud Risk?,” on July 18, 2018, at 1 p.m. Eastern. CAQ Executive Director Cindy Fornelli will moderate the panel discussion on how to deter fraud and misconduct in the development and presentation of non-GAAP measures.

From the Institute of Internal Auditors (IIA)

IIA Foundation Report Covers Internal Audit and Combating Bribery

On May 11, 2018, the Internal Audit Foundation published a report, “Auditing Anti-Bribery Programs,” on the integral role that internal audit has in anti-bribery programs. The report highlights components of strict anti-bribery programs, auditing techniques, and global organizations’ anti-bribery initiatives.